The Misconception of Zero and Other Unrealistic Vacancy Rates

During their real estate analysis of rental property, regardless of what real estate investment software is being used, the tendency of some real estate agents and investors is to use the vacancy rate the owner has been enjoying during his or her tenure as landlord.

For example, if the owner of an apartment complex currently for sale is reporting a zero (or very low) vacancy rate, the tendency for most is simply to take the owner at his or her word and plug that vacancy rate into their real estate analysis. (I can’t count the number of property analysis presentations I’ve seen where a listing agent boasted of a zero or unrealistic vacancy rate on a rental property they were marketing).

But this is not an accurate way for any analyst or buyer to measure the property’s income stream. Foremost, because the vacancy rate the current owner was able to maintain for his or her property does not necessarily reflect what a new owner might inherit.

The current owner, for instance, might have been charging the tenants yesterday’s rents—rents below what similar rental properties are charging today—and therefore the explanation why the building has remained full.

Or, the current owner might have the units filled with friends or relatives who might vacate the building once the property is sold and changes ownership.

Or, the current owner is a soft touch who has been willing to tolerate late payments and/or look the other way if the tenant created a disturbance or other issue that might have otherwise resulted in an eviction of the tenant.

In cases like these, the new landlord might be disappointed to discover that once rents are raised or tenant policies are more strictly enforced that tenants will vacate, leaving the new owner holding the bag on vacant units and less-than-desirable cash flows.

Here’s the bottom line. Real estate investors must always be suspect when a rental property owner reports zero or unrealistic vacancy rates, and when conducting their own real estate analysis must always use at least a five percent vacancy rate (or higher if the market indicates it). It just makes for smart real estate investing.